LivePerson, Inc.
Q2 2014 Earnings Call Transcript

Published: 31 Jul 2014

[Operator:]

Good afternoon. My name is Chanel, and I will be your conference operator today. At this time, I would like to welcome everyone to the LivePerson Q2 2014 Financial Results Conference Call. [Operator Instructions] On the call today, we have Dan Murphy, Chief Financial Officer; and Robert LoCascio, Chief Executive Officer. I will now turn the call over to Mr. Murphy.

[Daniel R. Murphy:]

Thanks very much. Before we begin, I would like to remind listeners that during this conference call, comments that we make regarding LivePerson that are not historical facts are forward-looking statements and are subject to risks and uncertainties that could cause such statements to differ materially from actual future events or results. These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The internal projections and beliefs upon which we base our expectations today may change over time, and we undertake no obligation to inform you if they do. Results that we report today should not be considered as indication of future performance. Changes in economic, business, competitive, technological, regulatory and other factors could cause LivePerson's actual results to differ materially from those expressed or implied by the projections or forward-looking statements made today. For more detailed information about these factors and other risks that may impact our business, please review the reports and documents filed from time to time by LivePerson with the Securities and Exchange Commission. Also, please note that on the call today, we will discuss some non-GAAP financial measures in talking about the company's financial performance. We report our GAAP results, as well as provide a reconciliation of these non-GAAP measures to GAAP financial measures in our earnings release. You can obtain a copy of our earnings release by visiting the Investor Relations section of our website. We will start the call with a review of the financial and operational highlights, and then Rob will discuss the go-forward vision for LivePerson. For the second quarter of 2014, revenue exceeded our guidance range. In addition, our GAAP, EPS, adjusted EBITDA and adjusted net income were all at the high end of our guidance range. Our sales team delivered on our largest bookings quarter in the company's history. Bookings were $10.8 million which is 53% growth over Q2 of 2013. Second quarter revenue was $51.1 million, an 18% growth over the same quarter in 2013. B2B revenue was $46.5 million, and revenue from our consumer segment was $4.5 million. Revenue from our enterprise and mid-market segment, which excludes small business, grew 23% over the second quarter of 2013. Based on our strong bookings and revenue results for the first half of 2014, we are increasing our annual revenue guidance for this year to $204 million to $207 million from previous guidance of $199 million to $204 million. In Q2, approximately 69% of our bookings came from existing customers and 31% came from new customers. Our trend of selling larger-dollar value deals to new and existing customers continued in Q2. Our average deal size was $82,000 for all deals. In addition, in the second quarter, we signed 7 deals greater than $500,000, of which 1 was for more than $1 million annually and several were multi-year commitments. We included in our booking metrics new or incremental contractual commitments for the first year of the contractual relationship in either new or existing customers for recurring subscription-based fees. That excludes from such amount nonrecurring fees, such as one-time implementation costs or one-time consulting fees. The bookings metric generally does not include or represent usage-based and/or Pay for Performance-based contracts, month-to-month contracts, transaction-based services or subsequent years of multi-year contractual agreements. As in the past few quarters, during Q2, we continued to expand relationships with new and existing customers. In the second quarter of 2014, we had 51 customers spending more than $500,000 on an annualized basis. This is up from 40 in Q2 of 2013. In addition, we have 27 customers spending more than $1 million annually, up from 23 in Q2 of 2013. We signed 132 deals during the quarter, including 37 new enterprise and mid-market clients. The average deal size for new customers was $91,000, while the average for existing customers signing up for an upsell or expanded business was $78,000. Customer attrition for enterprise and mid-market accounts averaged 0.8% per month compared to 1.1% in Q2 of 2013. Small business attrition rates averaged 1.8% per month compared to 2.1% in Q2 of 2013. Paper components generated approximately 14% of total enterprise revenue and 8% of total revenue. The revenue breakdown by industry verticals was consistent with prior quarters. Telecommunications made up approximately 30%; financial services, approximately 25%; retail, approximately 15%; technology, 15%; and other, approximately 14%. Revenue coming from outside the U.S. is approximately 34% of total revenue, with U.K. representing our largest concentration outside the U.S. We ended the quarter with a cash balance of approximately $71 million, which compares to $79 million at the end of the first quarter. We had approximately $2.9 million in capital expenditures for the quarter related to servers, computers and the build out of office space. We also used cash for the acquisition of Synchronite, and spent approximately $4.3 million repurchasing stock in the second quarter. Year-to-date in 2014, we have repurchased approximately 1.2 million shares, and over the last 18 months, we have purchased approximately 3.6 million shares or approximately 6% of our outstanding shares. We recently authorized an additional 10 million for the purpose of repurchasing stock. Second quarter accounts receivable came in at $33.9 million and our DSO metric for the second quarter was 60 days. The increase in DSO is related to upselling larger deals in addition to the increased in payment terms for some of our largest customers. The second quarter tax rate was 16%. From a bottomline perspective, our second quarter adjusted net income per share was $0.06, GAAP loss per share was $0.02, and adjusted EBITDA per share was $0.09, all of which were at the high end of our guidance range. That covers the highlights for the quarter. Now we'd like to discuss the financial expectations for the third quarter and full year of 2014. As we discussed on our last call, during 2014, we will continue to invest in the business in the rollout of our LiveEngage platform. Our current expectations for Q3 2014 are as follows

[Robert P. LoCascio:]

Thanks, Dan, and thanks, everyone, for joining us on the call. We had another strong quarter as we achieved our 48th consecutive quarter of growth, and I want to thank the team for their hard work and commitment to our strategy and execution on the vision. Over the past 24 months, I've been talking about how there's been a real change between consumer and brand in the digital world, and the consumer is definitely in-charge. And the consumers' voice is a massive voice, and it could be either very positive or very negative as an impact on companies. Now I remember my first job and my boss said to me, "If you don't do good for a customer and they're unhappy, they can tell 10 of their friends." And I remember, wow, that's a big number. But when you look at today, if the customer is unhappy, they can tell millions of people instantly, and there's a great case study of this. Only 2 or 3 weeks ago, if you were following, a Comcast customer, decided that he was going to take an 8-minute call that he was having with customer support. He's trying to cancel his service. And I won't go into the details. You should really Google it. There's actually like tens of thousands of things written about it right now. It was a terrible call. The customer support rep wouldn't let him cancel. Borderline unfunny, but the result was this

[Operator:]

[Operator Instructions] Your first question is from Shyam Patil with Wedbush Securities.

[Shyam Patil:]

Over the past -- it seems like over the past few quarters, you guys have done a good job of winning larger deals. And just curious, kind of going forward, how you're pipeline looks for the million-plus dollars deals. And is that something that you view as being important for the overall growth trajectory? And when you look at the platform, is the platform helping you increase the average deal sizes as you're able to sell it to larger enterprises?

[Daniel R. Murphy:]

That's a good question. Thanks, Shyam. Thank you. So from a deal perspective, we've invested in the sales organization, and our goals has been for them to get more strategic selling, and we're seeing some of the benefits of that happened over the last couple of quarters. We do want our sales guys to go out and look for those larger deals and get those larger opportunities out of the gate, and our customers are willing to sign up those deals. And from a platform perspective, it absolutely helps in talking about the direction that we're going, and from an engagement perspective and digital adoption. So it definitely helps from a selling perspective.

[Shyam Patil:]

Great. And in the past, you talked about new leadership for the small business segment. How do you think about -- or how should we think about the timing for improvement for the small business group? It seems like the mid-market enterprise group is growing really nicely. The small business group could probably see some improvement. How do you guys just think about the timing for that?

[Robert P. LoCascio:]

Okay. We're very focused on it right now. When we see the business, you'll see it as, really, 2 segments. One is what we call full service or strategic, and that's the plus-million dollars. And the rest, we call self-service, which was previously small business. So it's important to the strategy. Obviously, we just changed the website, and that's important. It's going to be like an e-commerce play for us. Buy marketing. Get people to put their credit cards in. Get them from a trial to conversion into a full-time client. So it's starting. We're just kind of looking at the funnels, looking how the consumers are going through the new website, but it's starting right now. So I would say we should expect growth coming up. But like I said, we just started launching the website and just started to get some information on it, but it's important to us. Very important.

[Shyam Patil:]

Great. And this is my last question. Rob, you mentioned Comcast not being a customer. If you could just talk about who they are using and what's been the hurdle there in winning that business.

[Robert P. LoCascio:]

Yes, I mean, obviously, it's on our target list and -- but they're predominantly a voice shop today. I don't know what they're using on the digital side. But the majority is still going through voice. So obviously, it's -- we've got a lot of the cable companies today, a lot of the telcos, but we're focused on it.

[Operator:]

Your next question is a from Richard Baldry with Roth Capital Partners.

[Richard K. Baldry:]

Can you talk a little bit about the sequential growth? It's I think the best number I can recall, and it was sharply above what we've seen you do before on a dollar basis. Was there anything unusual in that? Anything you feel is more one-time oriented? Or do you feel like sort of breaking through deployment backlog? Sort of any breakdown on that, just kind of gauge how sustainable it is as a new growth level.

[Daniel R. Murphy:]

Yes. I mean, so from a sequential perspective, it was a strong sequential quarter growth. We did -- we talked to a few -- a little bit about some of the larger deals we did in Q1, and those went live in Q2. So it had follow-on impact for Q2. Overall, our confidence level is shown by us increasing the guidance to $204 million to $207 million, up from $199 million to $204 million. So were comfortable with the increase in the guidance, and that was good quarter, second quarter. And we look forward to continue in Q3 and Q4.

[Richard K. Baldry:]

And any on the expense side, if we look at R&D, G&A, if you look year-over-year, they're pretty flat numbers. So your allocation into sales and marketing has certainly gone up significantly. Can you talk about how sustainable sort of those levels of spending in R&D and G&A are? How leverageable you're seeing there? Any sort of maybe currency benefits that are helping that?

[Daniel R. Murphy:]

So the currency benefits our small, but from a sustainability perspective, what we expect is G&A to level out, if not start to go down over time. We did have some investments to make from an infrastructure perspective. And then R&D, we've been investing in the platform over the last couple of years. And as we start to roll out the platform, we'll get more feedback, and I expect R&D to be at the levels that it is today, if not slightly higher.

[Richard K. Baldry:]

And then last one. The -- given the success that you saw with large deals, can you talk about how well you think the sales force has ramped now. If you did some significant changes there? How you feel about the productivity there? How much productivity gain do you think is left? And how much of the growth is in our sales force? How increase will come from headcount versus productivity over the rest of the year, maybe into '15?

[Robert P. LoCascio:]

Yes, there's a lot of productivity I still think we can get into the current sales force. We've started the process of obviously working with our customers with a different conversation, a different offering. So I think there's a lot of productivity in there, and that's where we're focused on, taking the current team we have. But they're doing a really great job. We set out on a strategy 2 years ago, and made changes in the sales team and the current leadership. And everyone who's in that team is doing a great job in working with our customers and getting the platform out into the market.

[Operator:]

Your next question is a from Mike Latimore with Northland Capital Markets.

[Michael Latimore:]

I guess the strong sequential growth, is that partly attributable to just improving deployment timelines as well? Or had those relatively constant for a couple of quarters now?

[Daniel R. Murphy:]

Yes. So Mike, great question. We did have some improvement in our deployment timelines. It was an issue back in early 2013, in the first quarter of 2013, but our team is focused on it. And obviously, with the rollout of the LiveEngage platform, our expectation is to reduce as much friction in the deployment as possible. And what we're seeing on the small business side is a matter of hours or minutes of people being able to deploy that campaign or take their first chats. So we did have some improvement in our deployment timelines.

[Michael Latimore:]

And can you just update us on LiveEngage 2.0 for your enterprise market? What's the timeline there for getting it more widely penetrated in your current customer base, let's say?

[Robert P. LoCascio:]

Yes, we're looking at -- towards the end of the year after the Aspire conference is really where we're going to show the number, obviously were out showing them the new platform there. They're using the older platform of LiveEngage, but we were out there showing it to them. They're excited. And then at Aspire is when we'll really showcase some of the stuff we're doing on the enterprise side.

[Michael Latimore:]

And the -- so you're landing, obviously, big deals before this next version comes out. I mean, do the customers ask about how to convert over to the next version? And kind of what's your comment around that?

[Robert P. LoCascio:]

Yes, like -- as I've said in the past, it's not hard to convert. In our practice, some PCs you can use to make an upgrade into the next version of the platform. And so some people are going to start using the reporting system that's in there, some are going to use the Agent Console. So the way we designed it is so that we wouldn't have these hard cutoffs, but there are some features that are in it that they want, they can move over when they want to move over. It doesn't -- as you can see in the numbers, it doesn't reduce our ability to, obviously, sell, and we're selling used cases. Increasing sales, decreasing cost, we can do with each platform. So when they're ready, we'll move them. But obviously, they have a reason to move because it's got a lot more in it.

[Michael Latimore:]

Yes. And then the consumer business, it's kind of the first real uptick in a while. Can you just give a little more detail around that?

[Robert P. LoCascio:]

Yes. It's -- we are focused on some other categories, especially in the education and tutoring side. They've done a very good job with that business. And it's just they're starting to expand. There's some great mobile plays going on over there. So they've got a mobile play that they're getting some very good traction in. So we're really happy with that. And as I've -- it's 7 years ago we bought them, but -- that company, originally, but they've done a very good job recently. And they've got people running it and doing a great job in bringing it to the next level.

[Operator:]

Thank you for joining today's conference call. You may now disconnect.